CalPERS, which has cooked the books for years, last week turned down the heat a skosh.
No one should deceive themselves that numbers from the California Public Employees’ Retirement System, the nation’s largest plan, will now accurately portray the extent of the pension crisis.
But the board’s unanimous decision to require that the state and local governments pay down future debt faster was a welcome step that should slightly help long-term shore up the ailing pension plan.
However, the new payment policy doesn’t go far enough. The 20-year repayment period is still too long. It won’t begin to make noticeable difference until 2021. And it only applies to future debt, not to the roughly $140 billion already accrued.
Even after a banner year for the stock market, CalPERS, by its own calculation, ended 2017 with only about 71 percent of the assets it should have had to help pay for future pensions.
That means its woefully unprepared to weather market losses from a major recession without a significant infusion of cash. And the shortfall is much worse than CalPERS portrays because the pension system continues to irresponsibly bank on unrealistic investment return forecasts.
However, the question before the board last week was not how to calculate the debt but rather how it should be repaid.
CalPERS administers pensions for the state and most local agencies in California. In the Bay Area, that includes Santa Clara County and most cities except San Jose and San Francisco, which run their own pension systems.
When CalPERS funding falls short of the investment forecast, it’s up to the public agencies, and ultimately taxpayers, to make up the difference. The shortfall is treated like long-term credit card debt with regular installment payments.
Public employees aren’t responsible for covering the payments. But they, and labor unions that represent them, want to keep their employers’ debt payments low so there’s more money available now for salaries and benefits.
Since 2005, they have successfully pressured the CalPERS board to minimize local governments’ installment payments. As a result, the payments have been stretched out over 30 years and back-loaded.
Consequently, the balance owed grows for about the first seven years, and government agencies take 16 years to even begin to pay down the original principal.
It’s a reckless financing scheme that should only appeal to the sort of person who racks up interest charges by maxing out credit cards and then making just minimum monthly payments.
It’s especially appalling when one considers that the money owed is for covering the cost of future pension payments workers have already earned. Just like salaries and health care coverage, pension benefits should be paid when workers perform the labor, not years later.
But CalPERS’ policy of deferring payments for three decades sticks our children and grandchildren with the cost of services from which we’ve already benefited.
It also leaves the pension system seriously short of funds. That’s why CalPERS Actuary Scott Terando recommended, and the board approved last week, reducing the repayment period from 30 years to 20 and leveling out the payments.
It wasn’t a radical step. Most independent county pension systems in California amortize debt payments over 15-20 years, although most unfortunately still backload the payments.
As Terando told the board, keeping CalPERS’ 30-year policy, or even 25 years, would not have been prudent. Under the state Constitution, board members have a fiduciary duty to act prudently.
Because the change applies only to new debt, repayment of past shortfalls will continue to be stretched over 30 years and backloaded.
Nevertheless, neither the League of California Cities nor the California State Association of Counties, which are still having a hard time admitting that debt deferral is irresponsible, could bring themselves to support it.
The change will mean that local government pension contribution rates will go up faster if CalPERS fails to meet its investment target. But they will also go down faster if investments surpass the mark.
Which brings us back to that troubling annual investment target, which the CalPERS board irresponsibly reaffirmed at 7 percent in December.
CalPERS’ chief investment officer and outside investment advisors forecast only 6.1 percent annually for the next decade, which would mean taking on even more debt for the next 10 years. To come up with the 7 percent annual average, Terando projects exceptional investment returns of 8.3 percent annually for the following half century.
Until CalPERS stops that sort of speculative and reckless behavior, it will continue driving the pension system deeper into a hole. That’s the next problem requiring correction.
